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John Fillmore's lifelong dream is to own his own fishing boat to use in his retirement. John has recently come into an inheritance of $400,000. He estimates that the boat he wants will cost$300,000 when he retires in 5 years. How much of his inheritance must he invest at an annual rate of 8% (compounded annually) to buy the boat at retirement?
The factory will create a lot of noise and fumes. The area is one with a high level of unemployment - people's incomes are below the national average. Before deciding whether or not to grant planning permission the government also considers the external costs and external benefits - that is, the impact on the rest of society other than the business itself.
The government will try to give a value to all of these costs and benefits. This is called cost-benefit analysis. This is not easy to do. For example, what is the cost of losing parkland for children to play on? Estimates are made and then the total costs and benefits of the decision are added up: private costs, added to external costs, give a total social cost, private benefits, added to external benefits, give a total social benefit figure. If the total social benefit is greater than the total social cost, the scheme is likely to be accepted. If, however, the total social cost is greater than the total social benefit, the government will probably refuse permission. What is meant by the term 'external costs'?